Hello again SCMP Global Impact readers,
China was the first economy in the world to succumb to the coronavirus pandemic, but the first to emerge from the other side. China’s economy has led the global economic recovery and continues to be a top growth driver going forward, meaning its outlook is central to that for the entire world.
In this issue, we’ll look at the state of the Chinese economy today and peer into our looking glass to try to divine where it’s headed, in the hope of shedding some light on the subject.
Senior Editor, Political Economy
Trying to thread the needle: not too hot, not too cold, just right
Beijing, like other governments around the world, is trying to thread the needle in setting economic policy as it continues to recover from the damage caused by the coronavirus pandemic. Trying to create a Goldilocks economy: not too hot, not too cold, but just right.
This is challenging in any context, but more so given the continued drag on growth - both in China and abroad - caused by the sharp resurgence in the Delta variant of the coronavirus. The economic impact was evident immediately: China’s draconian efforts to contain the Delta outbreak shut down the port of Yantian in southern China, one of the busiest container shipping ports in the world.
Beijing’s policy priorities seem clear: create sufficient growth to absorb new entrants to the labour force - including nine million new graduates this year - while at the same time starting to upwind the world’s largest pile of government, corporate and household debt accumulated since the Global Financial Crisis. A challenging work agenda.
So Beijing wants to keep the economy on an even keel, even amid expectations that growth will slow as the year progresses. Just released data suggest that the economy is holding up quite well.
As expected, Chinese economic growth slowed by 7.9 per cent in the second quarter compared to a year earlier, down from a record 18.3 per cent growth rate in the first quarter. However, compared to the previous quarter - which minimises the impact of base effects on the calculation - growth rebounded strongly to 1.3 per cent from 0.4 per cent in the first quarter. In addition, both industrial production and retail sales were stronger than expected.
In addition, Chinese exports again grew stronger than expected in June, as the China trade juggernaut gathered pace. Export growth had been predicted to slow in June as the economic recovery in industrial countries picked up pace, meaning they could produce their own goods rather than importing them. Predictions of a slowdown in the second half of this year persist, which would drag on growth.
But observers should be cautious of the trade outlook, given that similar predictions of an export slowdown were made for the fourth quarter last year. Instead, exports continued to surge to record levels in October, November and December, creating a record trade surplus and helping to power the Chinese economy forward.
With the economy doing fairly well at the moment, but predictions of a further slowdown prevalent, analysts are debating what economic stimulus steps Beijing might have to roll out in the coming months.
Earlier this year, Beijing promised “no U-turn” on economic support, meaning that it would not consider a return to the aggressive monetary and fiscal policies employed in the spring of 2020 to combat the economic damage caused by the pandemic. The government had stopped providing extra liquidity to financial markets and had cut back on fiscal spending.
But the government statement left room for “fine tuning” of economic support policy if the need arose.
On July 7, the State Council, China’s government cabinet, surprised by indicating for the first time in more than a year that the government was ready to ease monetary policy modestly by cutting banks’ reserve ratios - the amount of money they have to set aside against future loan losses.
Two days later, the People’s Bank of China (PBOC), the nation’s central bank, delivered, announcing a cut that would free up 1 trillion yuan (US$154 billion) for banks to lend. However, the PBOC downplayed the move as a structural adjustment and analysts said it would have little economic impact in the short-run.
That move suggested to analysts that the government was worried about the economic outlook and so predictions of new fiscal stimulus measures were put on the table despite the strong economic data for June.
The question is how much of a slowdown in growth Beijing will tolerate for the rest of the year.
Note that if growth were to slow to a 6 per cent rate in the fourth quarter this year, the Chinese economy would be right back where it was in the fourth quarter of 2019, before the pandemic began, when the economy grew 6.0 per cent compared to a year earlier.
At the end of 2019, analysts expected Beijing to set a growth target of “around 6 per cent” for 2020, in what they judged to be the minimum growth rate that would allow the government to achieve its objectives.
In other words, the pandemic produced a two-year interruption in the “new normal” growth path for the Chinese economy. It also could suggest that Beijing’s most recent policy fine tuning moves were meant to ensure growth would not fall much below 6 per cent at the end of year, rather than signalling broader concern about the economy that would require stronger policy action.
This is not to say that the Chinese economy is out of the woods. Given the rapid spread of the Delta coronavirus variant, more action may be needed in the future to prop up growth. But for now, expectations of substantial additional economic stimulus may be overdone.